Conflicts of interest are an inherent risk in any governance structure, particularly on the boards of non-profit organizations. While these boards are often composed of dedicated volunteers committed to advancing the organization’s mission, the overlap between personal, professional, and organizational interests can raise difficult ethical and legal questions. For Ontario non-profits, proactively managing conflicts of interest is not only a matter of best practice but also a legal obligation.

Understanding what constitutes a conflict, recognizing early warning signs, and implementing effective governance policies are crucial to maintaining trust, transparency, and legal compliance.

What Is a Conflict of Interest?

A conflict of interest arises when a board director’s personal, professional, or financial interests conflict, or appear to conflict, with their duty to act in the organization’s best interests. In a non-profit setting, this may involve a director who stands to benefit from a contract, decision, or transaction involving the organization. Conflicts can be direct, such as a financial interest in a service provider, or indirect, such as close relationships with someone who stands to benefit.

It is important to note that a conflict of interest is not inherently unethical or illegal. The issue is not the existence of the conflict itself, but how the organization identifies, discloses, and manages it. Left unchecked, even perceived conflicts can erode trust among stakeholders, damage the organization’s reputation, and expose it to legal liability.

The Non-Profit Legal Framework in Ontario

In Ontario, non-profit corporations are primarily governed by the Not-for-Profit Corporations Act. This Act establishes clear statutory duties for directors and officers of non-profits, including duties related to conflicts of interest. Under section 41 of the Act, a director or officer of a corporation who is a party to a material contract or transaction, or has a material interest in a party to such a contract or transaction, must disclose the nature and extent of that interest in writing or request that it be entered into the minutes of a board meeting.

The Act further stipulates that, unless otherwise permitted under specific provisions, the interested director must not participate in discussions or vote on any resolution to approve the contract or transaction. These requirements reflect a broader fiduciary obligation: board members must act honestly, in good faith, and in the corporation’s best interests.

Non-compliance with these provisions can have serious consequences. Contracts approved without proper disclosure and abstention may be declared voidable, and directors may be personally liable for any resulting damages or losses. For registered charities, failure to manage conflicts may also jeopardize the organization’s charitable status under the Income Tax Act.

Fiduciary Duties and the Duty of Loyalty

Board members of Ontario non-profits owe fiduciary duties to the organization, including the duty of loyalty. This duty requires directors to put the organization’s interests above their own, avoiding situations where personal interests may interfere with their decision-making responsibilities.

Unlike directors of for-profit corporations, non-profit board members are not accountable to shareholders or financial investors but to a broader community of stakeholders, including donors, members, program recipients, and regulators. This heightens the importance of ethical leadership and transparent governance.

The duty of loyalty does not imply that directors cannot have outside interests, but it does require them to ensure that those interests do not compromise, or appear to compromise, their objectivity. This is particularly important in smaller communities or sectors where professionals often wear multiple hats. Managing these overlapping interests with transparency is key to fulfilling legal and ethical responsibilities.

Recognizing Common Conflict Scenarios

Conflicts of interest on non-profit boards can arise in many forms. Some of the most common scenarios include:

• Contractual relationships: A director or their business stands to benefit from a contract awarded by the organization.
• Family or close relationships: A director’s relative or close associate is involved in a transaction with the organization.
• Dual roles: A director serves on the board of another organization that may have competing or overlapping interests.
• Personal or political agendas: A director uses their position to advance causes or policies not aligned with the organization’s mission.

These scenarios do not necessarily constitute wrongdoing, but require careful attention, full disclosure, and, where appropriate, recusal from decision-making.

Developing a Conflict of Interest Policy

The most effective way to manage conflicts of interest is to establish a clear and comprehensive conflict of interest policy. Such a policy should be adopted by the board and reviewed regularly to ensure it reflects current best practices and legal requirements.

A well-crafted policy should define what constitutes a conflict, outline disclosure procedures, specify when a director must recuse themselves, and describe the required documentation. It should also identify who is responsible for reviewing and responding to disclosures (typically the chair of the board or a designated governance committee).

In addition, the policy should include mechanisms for ongoing education and compliance, such as annual declarations of interests and regular training sessions. Directors should be reminded that transparency and accountability are cornerstones of effective governance and public trust.

Disclosure and Recusal Procedures

When a potential conflict arises, the director should immediately disclose it in writing or at the next board meeting. The nature and extent of the conflict should be recorded in the minutes, and the director should abstain from participating in discussions or votes related to the matter.

The remaining board members should carefully assess whether the conflict is manageable and, if so, take appropriate steps to insulate the decision-making process. In some cases, it may be prudent to seek independent legal advice or appoint a special committee to handle the issue.

While the Not-for-Profit Corporations Act outlines minimum legal requirements, many organizations choose to go further by requiring proactive declarations of interests at the start of each fiscal year and the beginning of each board meeting. These practices promote a culture of openness and help normalize discussions about conflicts of interest.

Transparency with Stakeholders

Non-profits operate in an environment of heightened public scrutiny. Donors, funders, regulators, and the general public expect non-profit organizations to uphold the highest standards of integrity. A well-documented approach to conflict management helps assure stakeholders that the organization takes its governance responsibilities seriously.

In some cases, it may be appropriate to disclose how conflicts have been managed in the organization’s annual report or on its website. While this level of transparency may not be required by law, it can be an effective tool for reinforcing credibility and donor confidence.

Addressing Conflicts After the Fact

Despite best efforts, conflicts of interest may occasionally be overlooked or improperly managed. When this happens, it is essential to respond promptly and transparently. The board should investigate the matter, determine whether any harm occurred, and take corrective action as necessary. This may include voiding a transaction, revising policies, or requiring a director to resign.

Failure to address past conflicts can expose the organization to reputational harm and regulatory scrutiny. Timely and decisive action demonstrates a commitment to good governance and can help rebuild stakeholder trust.

Conflicts of Interest and Charitable Status

For registered charities, conflict of interest management is not just a matter of good governance, but is integral to maintaining compliance with the Canada Revenue Agency (CRA). The CRA requires that charities devote their resources exclusively to charitable purposes and prohibits the use of charitable assets for private benefit.

If a charity is found to have improperly managed a conflict, such as by awarding a contract to a director’s company without proper oversight, it may be subject to penalties, including revocation of its charitable registration. As such, charities should be especially diligent in adopting and enforcing conflict of interest policies, keeping detailed records, and seeking professional guidance when necessary.

Building a Culture of Accountability

Ultimately, the management of conflicts of interest is about more than legal compliance. It reflects the values and culture of the organization. A board that embraces transparency, encourages open dialogue, and holds itself accountable will be better positioned to advance its mission and earn the trust of its community.

Creating this culture begins with strong leadership. Board chairs and executive directors play a critical role in modelling ethical behaviour, facilitating honest conversations, and reinforcing the importance of disclosure. Governance training and board evaluations can further support a proactive approach to conflict management.

Contact Willis Business Law for Top-Tier Governance Advice for Non-Profit Organizations in Windsor-Essex County

Conflicts of interest are unavoidable in board governance, especially in the complex and interconnected world of non-profit organizations. In Ontario, conflicts must be disclosed, managed, and documented in accordance with the Not-for-Profit Corporations Act and best practices in corporate governance.

At Willis Business Law, our innovative business lawyers help non-profits develop robust conflict of interest policies and manage conflicts after they arise. We also conduct governance audits to identify structural or procedural gaps that may give rise to conflicts. Our comprehensive non-profit services help community-serving organizations foster a culture of integrity, strengthen their organization, and safeguard their mission for the long term. Please contact us at (519) 945-5470 or reach out online to discuss how we can help.